The political crisis that has suddenly erupted in Canada adds yet another dimension to the seemingly unending shockwaves set in motion by the global financial crisis. The sheer political escapism that led all the leaders (even the NDP's Jack Layton) to solemnly pledge during the recent federal election not to run a deficit - when it was already clear that the severity of this crisis is such that no government can avoid a deficit even if wants to - has now rebounded on us with a vengeance.
One shock effect of Finance Minister Jim Flaherty's economic statement was that it so flatly contradicted Prime Minister Stephen Harper's conversion to Keynesianism on the road to Lima. What the statement showed was that while the government was going to talk the talk at international meetings, it was actually going to try to be a free rider on such stimulus as the Americans would undertake. The other shock was that the statement's proclamation of old-fashioned fiscal rectitude was tied to an opportunistic attack on free collective bargaining, pay equity and the public funding of political parties — not only narrowly partisan, but also largely gratuitous.
Without this, the opposition parties may not even have tried to defeat the government. But the ideological cover Barack Obama and Gordon Brown have given them in recent weeks must have helped steel their courage, even after Mr. Harper drew back, to unite behind the claim that their own reconversion to Keynesianism is more genuine - and genuinely multilateralist. And all constitutional precedents suggest that it will be very difficult for the Governor-General to deny them the chance to form and sustain a government so soon after a general election in which they together obtained a clear majority of the vote.
The question remains, however, whether the opposition parties themselves have taken on board, any more than Mr. Obama or Mr. Brown, just how much of a break is needed with the basic logic of capitalist markets in such a severe crisis. Sauve qui peut, each firm lays off workers and tries to pay less to those kept on; taken together, this has the effect of undercutting the overall demand in the economy. It's the classic case of micro-rational behaviour having the worst macro-rational outcome.
It was such illogic that initially led the Tories to use the statement to try to set an example for the private sector by restricting the collective bargaining rights of the secretaries and statisticians, cleaners and computer programmers who work for the government. This was exactly what the federal Liberal government did in the recession of the early 1980s and Bob Rae's Ontario NDP government did in the recession of the early 1990s. But even without this, whatever either any government might now do by way of direct public spending or adjusting taxes to encourage consumption will likely not be enough to offset the private sector's own tendencies to engage in the macro-illogic of cutting jobs and wages, and thus workers' main sources of income.
The specific problem in this particular crisis is that all the massive drops of liquidity that governments everywhere have helicoptered onto the financial system in the past 15 months have not restored the banks' capacity or willingness to lend at anything like previous rates - even to each other, let alone to firms or to consumers. The recent British and U.S. decisions to infuse their banks with public capital by buying some of their shares reflected the hope that this would overcome the banks' mistrust of each other's solvency. Mr. Flaherty's statement showed that the Tories are prepared, "if necessary," to do the same thing.
